The government revealed on Wednesday that the world’s second-biggest economy grew far less in the third quarter than it first estimated, unnerving investors and economists who believed the recovery was gaining momentum.

It turns out the economy is actually slowing.

Gross domestic product expanded at a modest annualized pace of 1.3 percent in the July-September period, much lower than the government’s preliminary figure of 4.8 percent provided last month.

The revision is the biggest on record. It also undershoots the growth of 2.7 percent in the second quarter.

Masamachi Adachi, senior economist at JPMorgan Securities Japan, expressed frustration over the big correction and questioned the reliability of the government’s GDP figures.

“It changes our basic understanding of the economy,” he said.

Stock markets also recoiled at the news, with the benchmark Nikkei 225 index shedding 1.3 percent to 10,004.72.

The revision stems largely from a misreading of capital investment - spending by companies on equipment, factories and other assets - which fell 2.8 percent from the previous quarter after the government incorporated additional data. The Cabinet Office had initially estimated that companies increased spending by 1.6 percent.

The new figure corresponds to 0.3 percent growth from the previous quarter instead of the 1.2 percent first reported.

“When releasing the preliminary figures, I commented with hope that a path for domestic demand-led recovery may have emerged, but now we need to re-examine that,” Keisuke Tsumura, parliamentary secretary of the Cabinet Office, told reporters, according to Kyodo News agency.

The road to recovery has only gotten rockier since the third quarter.

Japan faces intensifying deflation on top of a still uncertain global outlook. Compounding worries is the yen, which surged to a fresh 14-year high against the dollar late last month.

The country is particularly vulnerable to currency swings because it relies so heavily on exports to drive the economy. A stronger yen reduces the value of overseas profits for exporters like Toyota and Sony and makes their products more expensive in foreign markets.

Growing concerns led Prime Minister Yukio Hatoyama, to unveil a fresh $81 billion stimulus package Tuesday to keep Japan from lurching back into recession and bolster his party’s prospects ahead of upper house elections next year.

Despite shrinking tax revenue, the administration agreed to 7.2 trillion yen ($80.6 billion) in new spending after days of negotiations with coalition partners. The package includes measures to bolster employment, extend consumer incentives to buy eco-friendly products and provide support for small and medium-size firms hurt by the strong yen.

Analysts doubted whether the new government spending would do much to foster growth.

Ryutaro Kono, chief economist at BNP Paribas in Tokyo, expects Japan’s economy to hit a mild “soft patch” in the second quarter of 2010. While strength in Asian exports will help fend off recession’s return, persistent weakness within Japan will likely slow growth, he said.

“The fact that manufacturers are saddled with excessive capacity and employment that cannot be undone by a cyclical upturn means cost cutting will continue for some time,” he said in a report on Wednesday. That will depress sales of consumer goods and household incomes.

Private consumption, which accounts for 60 percent of the economy, rose 0.9 percent in the third quarter, up from a preliminary estimate of 0.7 percent. Exports were up 6.5 percent, compared with 6.4 percent in last month’s report.

GDP, which measures the total value of the nation’s goods and services, rose in the April-June period after posting a record decline in the first quarter amid the country’s worst recession since World War II.